ram small cap core
DESCRIPTION
As an emerging money manager, Redmond Asset Management, LLC offers Small Cap Core portfolio management services to institutions, non-profit organizations, endowments, and high net worth individuals via separately managed accounts. Utilizing our proprietary, “bottom-up” stock-picking model, we look for unique or distinguished companies that meet a variety of criteria and offer the most attractive opportunities for growth of capital.TRANSCRIPT
8001 Franklin Farms Drive, Suite 208
Richmond, VA 23229
Phone: 804.288.6080 | Fax: 804.288.6082
www.redmondassetmanagement.com
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Firm Overview
Redmond Asset Management (RAM) seeks to deliver top-notch client service and above average
investment returns by purchasing publically traded stocks that we believe offer superior risk
adjusted long term opportunities for growth of capital.
Founded by Scott Redmond in December 2005.
As of December 31, 2012 RAM had firm assets of approximately $156 million.
Located in Richmond, Virginia.
Organizational Chart
Investments Operations
Scott Redmond, CFA Founder
Small Cap Core Portfolio Manager & Lead Analyst
Lead Portfolio Manager
Jamie Alexander
Chief Compliance Officer,
Marketing, Operations
Tom Robertson, CFA
Small Cap Core Analyst
Portfolio Manager
Jeremy Kirkland, CFA
Small Cap Core Analyst
Portfolio Manager
Jim Jollay
Equity Strategist
Analyst
Margaret Phillips
Client Service,
Trader,
Operations
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Full bios found on pages 23-24
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AU
M
Mill
ion
s Two Phase Growth Plan
Individual SMA Clients Small Cap Core Institutional SMAs
Jeremy Kirkland Jim Jollay
Tom Robertson
PHASE I
Develop Bedrock Business
Create Small Cap Track Record
Status: COMPLETE
PHASE II
Grow Small Cap Core
Maintain Bedrock Business
Status: JUST STARTING
Marketing
Commitment
Soft Close $300M
Hard Close $500M
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Return History1,2,3
RAM Small Cap
Gross Return (%)
RAM Small Cap
Net Return (%)
Russell 2000®
Total Return (%)
2012 22.4 21.2 16.4
2011 -0.6 -1.6 - 4.2
2010 33.7 32.4 26.9
2009 45.4 44.0 27.2
2008 - 46.4 -47.0 - 33.7
2007 4.1 3.1 - 1.6
1 Past performance is not indicative of future performance. Client investment returns will be
reduced by the advisory fees and other expenses it may incur. Advisory fees are negotiable. 2 GIPS Compliant Presentation found on page 25. 3 Returns are shown in U.S. Dollars.
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Annualized Returns1,2,3
Ending 31 Dec 2012
1-Year 3-Year
Annualized
5-Year
Annualized
RAM Small Cap
Gross Return 22.4% 17.6% 4.9%
RAM Small Cap
Net Return 21.2% 16.4% 3.8%
Russell 2000®
Total Return 16.4% 12.3% 3.6%
1 Past performance is not indicative of future performance. Client investment returns will be
reduced by the advisory fees and other expenses it may incur. Advisory fees are negotiable. 2 GIPS Compliant Presentation found on page 25. 3 Returns are shown in U.S. dollars.
Firm Ownership and Compensation
Scott Redmond founded the firm, owns 100% of the firm, and serves as the benevolent dictator
Meritocratic Compensation (don’t bother asking for the formulas)
I. The source of revenue is the source of compensation
A. Analysts are evaluated on long term performance of recommendations vs. the benchmark and the proprietary screen
B. Portfolio Managers are evaluated vs. Analyst Recommendations
C. Analysts and Portfolio Managers may earn a portion of New Business/Client Retention revenues
Succession Plan
I. Key Person Insurance exists for Scott Redmond and Jeremy Kirkland
II. Should Scott Redmond die
A. Chief Legal Counsel becomes interim CEO
B. Resources are in place for an orderly transfer of ownership and responsibilities
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Core Investment Beliefs
Components of Persistent Long Term Alpha
I. High Active Share
II. Low to Moderate Tracking Error
III. Low Turnover
IV. No Factor Bets
V. Investing is More Art Than Science
(More UC Berkley than Caltech)
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Science Behind Our Beliefs
I. “Research shows that funds with high active share and moderate tracking error deliver excess
returns on average.”1
II. Active Share2
A. “Active Share significantly predicts fund performance relative to the benchmark.”2
B. “We also find strong evidence of performance persistence for funds with highest Active Share.”2
C. “Active Share has greatest predictive power for returns among small-cap funds.”2
III. Proprietary Analysis by RAM
1Michael J. Mauboussin, “Mauboussin on Strategy”, February 24, 2012 http://www.petajisto.net/media/20120224lm.pdf.
2K. J. Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager? A New Measure That Predicts
Performance,” March 31, 2009 http://www.petajisto.net/research.html
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Manage to High Active Share and Low/Moderate Tracking Error Portfolios
I. NO FACTOR BETS
II. Ownership of Industry Dominant or Distinguished Companies
A. Diversify by business, not by GICS Sector Code
B. Reduced Systematic Risk
III. Long term exposure to “Antifragile*” Companies
*The term “antifragile” was introduced by Nassim Taleb
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Stock Selection
I. Overwhelmingly RAM seeks ownership of
A. Industry Dominant Companies
B. Distinguished Companies
II. Stocks usually originate from a Proprietary Screen, but may come from other sources
III. Up to 5% of the portfolio is allocated to immature or speculative companies
IV. The Process is 90% fundamental and 10% quantitative
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Equity Investment Philosophy
I. Find long term investments in Great Growth Companies through Bottom-Up Stock Picking
II. Great Growth Companies exhibit the following:
A. Outstanding Management and Corporate Culture
B. Industry or Niche Dominance
C. High or Rapidly Growing RAM Margins*
D. Disciplined use/reinvestment of cash
III. We believe our stocks could outperform the stock market over the long run because:
A. Cash generation creates wealth for the company
B. Prudent reinvestment of that cash increases company wealth even more!
C. Eventually, an increase in company wealth may translate into proportionately higher stock prices
*a proprietary calculation
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RAM Margin
Proprietary Calculation
Adjusted Cash Flow – Adjusted Cost of Capital
Adjusted Invested Capital
What It Means To Us
Consistently positive RAM Margins may indicate:
A well run company
Operating in a Niche, or
Dominating an industry
Rapidly rising RAM Margins may indicate:
Change in competitive landscape
Past investments starting to pay off
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Typical Investment Process
2000
Company
Universe
Four Screens
RAM Margin
Fundamental Growth
Relative Strength of
Stock Price
Earnings Estimate
Revisions
200
Candidate
Companies
Fundamental Analysis
Growth Prospects
Competitive Advantage
Corporate Culture
Return Expectations
Earnings Based
Cash Flow Based
Portfolio Considerations
Sector Weight
Liquidity
50-70
Stock
Portfolio
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Equity Sell Disciplines
I. Fundamental
A. Loss of confidence in management
Results in complete sale
B. Fundamental deterioration
We usually scale out as evidence of deteriorating fundamentals builds
II. Price Related
A. Overvaluation
We usually scale out as the stock becomes overvalued
B. Monitor holdings for absolute and relative performance
We do not use price targets
Portfolio Construction
Broad Ensemble of Industry Dominant or Distinguished Companies (50-70 stocks)
I. Drivers (3%-7% weight per stock)
A. Deep knowledge of and strong conviction in the company
B. Compelling risk return of the stock
II. Core Positions (1.25%-3% weight per stock)
A. Solid Companies
B. Stocks have attractive risk return potential
III. Incubators (<1.25% weight per stock)
A. General inclination toward the stock
B. Immature or speculative companies
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Ownership Mentality
Year First
Purchased
% by
weight* % by count
2007 24 20
2008 13 9
2009 10 15
2010 15 21
2011 19 22
2012 10 13
*as of 12/31/2012. Cash was 9% by weight.
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True long term investors
Know what we own and why we own it
Opportunity to know companies well over time
Our Primary Short Run Risks To Relative Performance
I. Low and Increasing Market Dispersion*
II. Speculative Bubble
III. Junk Rally
* We would like to acknowledge the influence of the Antti Petajisto, “Active Share and Mutual Fund Performance”,
December 2010 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685942
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General View of Risk
I. To RAM Risk Is A Function Of1:
A. The amount of money you stand to lose
B. The likelihood of the loss occurring
II. Greatest Source of Risk Is Ourselves
III. To RAM Risk Is Not1:
A. Price Volatility
B. Beta, Correlation, Tracking Error etc…
1We would like to acknowledge the influence of the greater works of Seth Klarman
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Managing Risk
I. Simplified Investment Process1: A. Accentuates roll of skill versus luck in long run outcomes1
B. Anchored to Core Beliefs
II. Limit AUM
A. Wider spectrum of investable ideas
B. Soft Close at $300M
C. Hard Close at <$500M
III. Check Lists1
A. Prior to Purchase
B. Monitoring Existing Holdings
IV. Maintain a log of various thoughts1
• oddly the most valuable log is “if we are wrong it will probably unfold like…”1
V. Active Introspection of Behavioral Biases and Cognitive Errors1
1We would like to acknowledge the influence of the greater works of Michael Mauboussin
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Adaptation of Heisenberg Uncertainty Principal
I. In our words: Measurement Perturbs
• Werner Heisenberg concluded you cannot simultaneously precisely know both the location and speed of
a particle, because to measure one perturbs the other
II. Too frequently measuring the performance of a long term strategy perturbs the investment
process… if you are human!
III. We believe in the science behind our art
IV. We grind through process, aware of performance
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Fee Structure1
Asset Amount Annual Fee
Less than $50,000,000 1.00%
Greater than $50,000,000 0.85%
1 Fees are negotiable
Investment Team
R. Scott Redmond, CFA Jeremy Kirkland, CFA Tom Robertson, CFA
RAM
Founder
Small Cap Core Portfolio Manager &
Lead Analyst
Lead Portfolio Manager
Small Cap Core Analyst
Portfolio Manager
Joined RAM in 2006
Small Cap Core Analyst
Portfolio Manager
Joined RAM in 2012
Experience
The Capital Management Corporation,
2002 – 2005
Director of Research
Portfolio Manager
Godsey & Gibb Associates, 1998 –
2002
Portfolio Manager, Research
Analyst, Sales Associate
Financial Analyst at HCA
Healthcare Inc.
Dynegy, Inc
Gardner & Robertson, President
and Co-Owner
Anderson & Strudwick, served in
various roles over 30 years:
President, CEO, Director of
Research, CCO, and CFO.
Education
Washington & Lee University
BA Chemistry, 1994
Philadelphia College of Osteopathic
Medicine, MS, 1996
Washington & Lee University
BA Economics, 2002
University of Virginia
B.S. Commerce, 1968
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Operations Team
Jamie Alexander Margaret Phillips
RAM CCO, Marketing, Trading, Operations
Joined RAM in 2010
Client Service, Trading, Operations
Joined RAM in 2012
Experience
Analyst at StreetAccount, LLC, Jackson Hole, WY – 3 yrs.
A subscription based financial news website.
Jackson State Bank & Trust, Jackson Hole, WY – 1 yr.
Accounting and Commercial Loan Support
Gardner & Robertson
Anderson & Strudwick
Legg Mason
Davenport & Company
Education University of Virginia
BA History, 2005
University of Virginia
BA Anthropology, 1980
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Third-Party Relationships and Services
Custodians Legal Support GIPS Verification Critical Software
BB&T
Charles Schwab
Fidelity
Merrill Lynch
Sterne Agee
SunTrust
TD Ameritrade
Wells Fargo
Christian & Barton, LLP
Alpha Performance
Verification Services
Thomson Reuters
Captools
Microsoft 365
Sub-Advisory and Wrap Program Relationships Compliance
GARP Strategy
offered via Merrill
Lynch Managed
Account Service
(MAS)
RAM’s GARP Strategy is offered via
Sterne Agee Investment Advisor, Inc.
and via a model portfolio to a local
money manager.
RAM provides equity
portfolio management
services to a local money
manager.
ACA Compliance
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Redmond Asset Management, LLC Small Cap Composite
1 January 2007 through 31 December 2012
Year
End
Composite
Gross
Return (%)
Composite
Net-of-Fee
Return (%)
Benchmark
Return
(%)
Composite
3-Yr St Dev
(%)
Benchmark
3-Yr St Dev
(%)
Internal
Dispersion
(%)
Number
of
Portfolios
Composite
Assets
($ M)
Firm
Assets
($ M)
2007 4.1 3.1 -1.6 n/a n/a n/a ≤ 5 0.40 34.2
2008 -46.4 -47.0 -33.7 n/a n/a n/a ≤ 5 0.21 39.4
2009 45.4 44.0 27.2 33.9 25.2 n/a ≤ 5 0.31 79.6
2010 33.7 32.4 26.9 36.7 28.1 n/a ≤ 5 0.41 100.9
2011 -0.6 -1.6 -4.2 30.7 25.4 n/a ≤ 5 0.41 119.7
2012 22.4 21.2 16.4 20.5 20.5 n/a ≤ 5 0.50 154.5 Redmond Asset Management, LLC (referred to as RAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in
compliance with the GIPS standards. RAM has been independently verified for the periods 1 January 2007 through 31 December 2010. Verification assesses whether (1) the firm has
complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present
performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. The Small Cap composite has been examined for the
periods 1 January 2007 through 31 December 2010. The verification and performance examination reports are available upon request.
Notes: 1 Redmond Asset Management, LLC is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was
founded in 2005 and registered with the SEC on 12/22/2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional,
and individual investors. The firm is wholly owned by the founding principal, R. Scott Redmond, CFA. Policies for valuing portfolios, calculating performance, and preparing compliant
presentations are available upon request. 2 The Small Cap Composite includes all discretionary portfolios that are managed according to RAM's Small Cap investment strategy. The strategy uses a bottom-up stock selection approach
to identify fifty to seventy small capitalization companies with high quality management teams, industry and/or niche dominance, with historical and continuing high returns on invested capital
and reinvested cash. The firm defines small cap companies as those with market capitalizations less than $2 billion, or those companies with market capitalizations no larger than the most
recently reported market capitalization of the largest constituent of the Russell 2000 Index. There is no account minimum restriction for the composite. 3 The performance benchmark for the composite is the total return of the Russell 2000® Index, as reported by Russell Investments. The composite returns may be significantly more or less
volatile than the benchmark returns. 4 Valuations are computed and performance is reported in U.S. dollars. 5 Composite Gross Returns are presented before management and custodial fees but after all trading expenses. Composite Net-of-Fees Returns are presented after all custodial fees, trading
expenses and management fees. Net-of-fee returns are calculated using actual management fees, which are accrued on a quarterly basis. Composite and benchmark returns are presented
gross of withholding taxes except for foreign tax withholding on ADR securities. The standard fee schedule for the composite is 1.00% on the first $50 million. Fees are negotiable. 6 This composite was created in June 2009. A list of composite descriptions is available upon request. 7 R. Scott Redmond, CFA has served as the lead portfolio manager of the small cap strategy since inception. In July 2012, RAM hired Tom Robertson, CFA who now serves as an analyst for
the Small Cap strategy and manages our new Growth at a Reasonable Price “GARP” strategy. RAM’s total firm assets increased significantly because many of Tom’s existing clients
transferred with him. 8 The three-year annualized standard deviation measures the variability of the composite gross returns and the benchmark returns over the preceding 36-month period. The three-year
annualized standard deviation is not presented for 2007 and 2008 because the composite did not yet have 36 monthly returns as of that date. 9 RAM has adopted a significant cash flow policy for the Small Cap Core Composite. When an external cash flow exceeds 10% of an account's value, that cash flow is segregated into a
temporary account until the funds are invested according to the composite strategy or disbursed.
Appendix: Current Business Overview
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$160 Million AUM
Classification Small Cap Mid Cap Large Cap Fixed
Income
Normal
Ranges $30 - 45M $35 – 50M $50 – 80M $5 -15M
Account Types
Small Cap
Product All Cap and Balanced Separately Managed Accounts
(primarily HNW individuals with a personal connection to a RAM employee*)
< $1M $159M
SMA Product Individually Tailored SMAs GARP Model
*Stable and Enduring Business
*RAM and its employees are under no financial pressure; we can be patient!
Resource Allocation
SALES AND MARKETING
through 2012 HNW - primarily by word of mouth - 95% Small Cap
Databases
after 2012 Small Cap Core Product - 100%
Past, Present and
and Future
RESEARCH
Small Cap
50 - 60%
Mid Cap
20 - 30%
Large Cap
20 - 30%
Fixed
Income
1 - 3%
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Disclaimers
Past performance is no guarantee of future results.
Information provided in this brochure is for educational and illustrative purposes only and should not be construed
as individualized investment advice. We recognize that each client’s investment needs and goals are different, and
that the investments or strategies discussed herein may not be suitable for all investors. Any opinions or estimates
contained in this brochure constitute the judgment of Redmond Asset Management, LLC (RAM) as of this date
(December 31, 2012) and are subject to change without notice.